Jones Lang LaSalle publishes Q3 2012 Dubai and Abu Dhabi Market Overview reports

Within a general atmosphere of improving investor confidence and an optimistic business outlook across the UAE, Dubai remains the more robust market, seeing steady rental and price growth for prime assets in the hotel, retail and residential sectors. The Abu Dhabi market remains some way behind Dubai in terms of the timing of recovery, with most sectors of the market in Abu Dhabi remaining tenant favourable, seeing on-going price and rent declines.

Commenting on the reports, Mr Alan Robertson, CEO of Jones Lang LaSalle, Middle East & North Africa, said: "Market sentiment is definitely improving and both Dubai and Abu Dhabi remain major drivers in the regional real estate market, but we are continuing to move away from one holistic model. As the market continues to mature we will see more divergence. Well managed, high quality assets in prime locations will continue to perform whilst those in secondary locations will need to be ever more creative to attract and retain tenants who now have ever more choice and are moving with their feet to source and find the best deals available."

He adds: "In terms of market specifics, it's a very fragmented picture. Dubai is generally ahead of the curve as rents are finally starting to pick up whilst indicators suggest Abu Dhabi has yet to bottom out. In terms of sectors, retail remains a driving force with significant opportunities in both Emirates. On the investment and development fronts, we expect to see more major deals announced in the weeks and months ahead, reflecting the improved economic climate. However we also expect the market to move away from a construction led environment to one more focussed on asset management as owners look to safeguard their investment and drive rental growth."

Summary highlights, Dubai Market Overview, Q3 2012:

• The Dubai economy is still on a recovery path. Gross Domestic Product is projected to grow by 4.5% in 2012.This performance is being driven by the strong growth of key sectors such as tourism, commerce, retail, hospitality and logistics.

• The real estate investment market has been quiet over the summer months, with no major open market commercial transactions reported in this seasonally quiet period. The most significant sale over the quarter was a residential tower in the Deira area of Dubai that was reportedly sold to a Saudi investor for Dhs130m.

• Asking rents for prime office space remained flat in Q3, while secondary rents faced more downward pressure. In line with global trends, occupier consolidation and portfolio optimisation remain the key focus in Dubai. Larger companies continue to show interest in upgrading premises with more flexibility in their leases. There has been limited new office supply entering the market in the third quarter and a number of projects have been delayed into 2013.

• The overall residential market has recorded another positive quarter, with the villa market continuing to outperform the apartment sector in Q3. Prime residential buildings in well established locations continue to see improved performance, but secondary locations are still suffering from rental and pricing declines as tenants relocate to new high quality projects.

• There remains strong demand for retail space in the best performing super-regional malls (eg: Dubai Mall, Mall of the Emirates), resulting in sustained prime rents of AED 4,700 / sq m. However the retail market is becoming increasingly two-tier and older, less popular malls are seeing weakened demand from consumers and retailers, with mall owners having to consider new marketing techniques and product positioning.

• The hotel sector has continued its strong performance in Q3 with occupancy levels improving to 77% from 74% in the same period last year. This growth has been mainly driven by the increase in tourist arrivals compared to the same period last year. The recovery of the Dubai hotel market has been reflected in an increase in both Average Daily Rates (ADRs) and Revenue Per Available Room (RevPar) levels.

Summary highlights, Abu Dhabi Market Overview, Q3 2012:

• While completions were limited in Q3 2012, the Abu Dhabi market remains tenant favourable for most asset classes.

• There were no significant additions to the office market over the past quarter with the total office stock remaining at approximately 2.7 million sq m. Significant new supply is due for delivery in Q4 2012, which will push down average rents, particularly for secondary quality assets, but in turns this will also drive occupier relocations improving, take-up rates.

• The residential market continued to see sale price and rent declines. Since the market peak in 2008, the average prime rent for a two bedroom apartments in Abu Dhabi has fallen in excess of 48%.

• The Executive Council has announced a new regulation requiring all employees of the Abu Dhabi Government and its affiliated entities to live within the Emirate. This regulation, which is planned to take affect from late 2013 could strengthen the negotiating position of landlords and help stabilise rentals in the residential market.

• No additional retail malls were completed in Q3, with the opening of several centres delayed until H1 2013. An estimated 200,000 sq m of retail GLA could be delivered to the market by mid-2013. Rents in prime retail malls on Abu Dhabi Island have remained unchanged over the past quarter.

• Given the spending power of the local population and additional growth from increasing tourism, there remains significant demand for retail space in the Abu Dhabi market, some of which is currently serviced by Dubai. The delivery of upcoming projects will help address this unmet demand.

• No new supply entered the hotel market in Q3 2012, but a number of major hotels are anticipated for delivery in Q4 2012. This will put additional downward pressure on Average Daily Rates (ADRs) and hotel occupancy rates.

Commenting on the Q3 2012 reports, Craig Plumb, Head of Research for Jones Lang LaSalle in MENA notes that: "While the Dubai market is certainly starting to recover, this improvement remains largely focussed on a limited number of high quality assets / locations, and has yet to trickle down to the overall market where rents and values have remained largely unchanged during 2012. The overall market still faces challenges of high new supply and limited demand for secondary assets, that is providing tenants and occupiers with significant choices."